Economic slowdown looking smooth

THE economy is battening down the hatches for several months of sluggish growth as it moves into the autumn, City analysts have warned.

They say recent surveys showing the housing boom is over, consumer confidence is floundering and manufacturing is struggling indicate that growth has peaked. And many are ripping up their forecasts of higher interest rates.

The slowdown suggests that the five rate increases by the Bank of England since November - from 3.5% to 4.75% - may have been sufficient to put the brakes on the economy and bring growth back to a more pedestrian pace.

But it is not all doom and gloom. A surprisingly upbeat report on the service sector - which accounts for about 70% of total output - indicated the recovery is running out of steam rather than falling off a cliff.

The CIPS/Reuters purchasing managers' index last week showed activity accelerated in August as new business continued to flood in.

'There has been a huge overreaction to the recent run of weak data,' said David Hillier at Barclays Capital.

'In the first phase of a cyclical upturn the indicators are very strong, but during the second phase you have to expect the balances to fall back.

'The prospects for the economy are still good. All the evidence suggests that the Bank has successfully slowed the economy in an ordered, rather than a dramatic way,' he added.

Geoff Dicks at Royal Bank of Scotland said the findings of the CIPS/Reuters services report showed it was too early to write off the consumer. 'The consumer is never dead until you've seen the corpse,' he said.

However, the CBI's latest snapshot of the High Street suggests the consumer, if not dead, looks set for a long spell in intensive care. It shows retail sales growth was the weakest for 18 months, although wet weather undoubtedly played its part.

Malcolm Barr at JP Morgan said the biggest cloud on the horizon remains uncertainty about whether the housing market can avoid a crash. Halifax last week said house prices suffered their first fall for two years in August.

'The extent of the deceleration in the housing data is eye-catching,' Barr said. 'The adjustment process that looked like it would be fairly gradual has been more abrupt, and it would be worrying if this were to continue.'